The days since Philip Hammond’s Budget have seen a concerted effort by the Conservatives and their media outriders to push the idea that government can’t borrow to invest. It takes something of a brass neck for them to ignore the worst set of economic forecasts ever presented by the Office for Budget Responsibility and instead to fixate on economically discredited rubbish about the costs of government investment.
The truth is that those currently throwing their hands up in mock-horror at the thought of a government actually seeking to intervene and so make the economy work for people are on the wrong side of the economic argument – and the wrong side of history. Britain is now the slowest growing economy in the G7 group of developed countries. It has the lowest rate of investment in the G7. Productivity growth, the motor of wider economic growth, has stalled, and the direct consequence of this is that wages are lower than in 2010 and are set to fall for years to come.
Facing these dire projections, of course a government should look to intervene. What Labour has argued for is that the backbone of our economy – its infrastructure of transport and communications – has been weakened after years of Tory cuts, with government investment spending falling by £20bn in real terms under Conservative-led governments. We are also not building enough houses, and, disastrously for our future prosperity, the Tories even managed to cut research spending by £1bn in five years.
The way to correct this is to invest, but to invest responsibly. Labour is committed to its fiscal credibility rule, announced last year, which says we must cut the deficit on day-to-day spending and that we can only borrow to invest: in infrastructure, housing, and research and development.
This rule, drawn up in consultation with world-leading economists, means that Labour can set out a plan to bring the deficit back into line, and rebuild our broken economy – investing not only (as the Tories do) in a few favoured places; London is currently scheduled to receive half of all transport investment – but making sure everywhere can reach its potential. And, by investing, we can create jobs, improve productivity, and grow the economy. The Institute of Fiscal Studies have confirmed that, even with very conservative assumptions on how much the economy will grow from investment, Labour’s plans will result in a lower burden of debt at the end of five years than at the start.
So the current argument about the costs of borrowing is completely misplaced, because it never considers the benefits. When a government invests wisely, in assets that produce a return on the investment, the net cost to the taxpayer of the investment is zero.
It is the same mechanism at work when a business borrows to expand by buying new equipment – because the business grows, the borrowing can be repaid, with a profit. And with interest rates almost the lowest they have ever been, it makes sense to invest now. Other developed countries make sure their governments invest, whether it is in ultra-fast broadband in South Korea or research spending in the US; and even this government, has grudgingly admitted the benefits of investment, releasing a small amount of funding for a very few favoured projects – on nothing like the scale needed, of course.
The row, ultimately, is ideological. Those trying to argue solely about the costs of government investment, without considering the benefits, are doing so (knowingly or otherwise) on the basis of the discredited, neo-liberal belief that governments cannot do anything for the economy. It is the same, discredited argument that drives privatisation and austerity. Labour is determined to win the argument, and build an economy that works for the many, not the few.
Peter Dowd is shadow chief secretary to the Treasury and MP for Bootle.